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American Apparel’s bankruptcy sale puts its retail future in doubt

January 12, 2017 02:06 PM

(Bloomberg)—American Apparel, once a high-flying retailer that peaked at more than $600 million in sales, is probably headed toward liquidation after a bankruptcy auction ended with Canadian T-shirt and underwear maker Gildan Activewear Inc. buying intellectual property and other assets for $88 million.

This transaction doesn’t include American Apparel’s stores, and the fate of its garment workers in Los Angeles remains in doubt. The company had 4,700 employees and 110 stores as of November, when it filed for bankruptcy for the second time in 13 months.

Gildan said it has no obligation to keep any American Apparel employees.

“We’ve never been in a position to be able to assume operations,” Garry Bell, a spokesman for Montreal-based Gildan, said in an interview Tuesday. “We’re not buying an ongoing concern.”

The end comes about two years after American Apparel’s board orchestrated the firing of founder and chief executive officer, Dov Charney, for alleged misconduct, which he denies. Charney engaged in a bruising—and ultimately futile—public battle to regain control.

Saddled with high-interest debt racked up during Charney’s tenure, American Apparel first filed for bankruptcy in October 2015 and was taken over by former bondholders led by Monarch Alternative Capital. The retailer generated an estimated $62.1 million in online sales in 2015, according to Top500Guide.com data.

But the reorganization did little to slow American Apparel’s decline as sales continued falling. A second bankruptcy, filed in November, focused on auctioning the company with an initial offer from Gildan for $66 million. Charney accused management of making a “colossal mistake” and destroying the company he started as a college student.

‘Extremely disappointed’

“I’m extremely disappointed,” he said in an interview Tuesday. “This shouldn’t have happened.”

Charney blamed American Apparel’s downfall on “reckless Wall Street behavior” and said the company’s decline also hurt its suppliers, which employ thousands of people in the Los Angeles area.

“This was a good company,” said Charney, who’s working on a clothing startup. “We were exporting to the world and paying fair wages. All of that has now gone away.”

Amazon.com Inc. (No. 1 in the Top 500), Forever 21 Inc. (No. 272) and Authentic Brands Group LLC considered making offers for the assets, a person familiar with the situation said before Monday’s auction. Next Level Apparel submitted a bid, according to Reuters. Next Level couldn’t immediately be reached for comment. Representatives for Amazon, Forever 21 and Authentic Brands didn’t respond to requests for comment.

In the end, Gildan wound up the winner after raising its offer by $22 million.

What next?

What happens to the American Apparel brand remains to be seen. American Apparel can keep selling clothes in stores and online under a 100-day license, said Bell. The bigger prize is to fold the wholesale business into Gildan’s North American division to gain market share in fashion basics.

Before the auction, American Apparel creditors urged Gildan to find a partner for the parts of the company it didn’t want, including the stores. Since the November bankruptcy filing, American Apparel has been liquidating its least profitable locations, according to court records. More promising stores could still be taken over and run under the American Apparel name.

“We do think that marrying the parties is going to be the key here,” Cathy Hershcopf, an attorney for creditors, said in court last month.

Brand expansion

Gildan has expanded into branded clothing and produces Under Armour Inc. (No. 100) socks for retail, and the acquisition may help the 30-year-old company grow in the more fashionable and lucrative end of the screen-printing business, which makes up about 60% of its revenue.

Bell said Gildan hasn’t decided where American Apparel-branded goods will be made from now on, but it chose not to exercise the right to assume leases on two factories and a distribution center in Los Angeles. The Canadian company is buying sewing machines and knitting and dyeing equipment for making wholesale products. Gildan already has plants in states including North Carolina and Georgia, but socks are the only finished goods made in the U.S.

A Montreal native, Charney started the precursor to American Apparel in 1989 during his freshman year at Tufts University in Massachusetts. He never graduated, setting off instead for South Carolina, where he started making T-shirts. Ten years later, he moved operations to Los Angeles, where there was greater manufacturing capacity. He took the company public in 2005 and built the retail side into a global operation.

Charney stood out among his rivals by focusing on making well-crafted basics in the U.S. when clothing manufacturing was flowing to Asia. He also courted controversy with sexually charged advertisements featuring nonprofessional models and stunts like putting pubic hair on mannequins. Lawsuits accusing Charney of sexual harassment also brought the company plenty of attention. Those cases were all dismissed or settled.

The company will operate normally until the sale is approved by the Delaware judge overseeing the bankruptcy and the deal closes, which would be at the end of this month at the earliest, according to an American Apparel spokeswoman.

“We know that this brand has a strong consumer following,” said Gildan’s Bell. “We just haven’t at this moment in time actually established what our plans are to bring this brand to consumers.”

The case is In re American Apparel LLC, 16-12551, U.S. Bankruptcy Court, District of Delaware (Delaware).